The Political Economy of Indonesian Economic Reforms: 1983–2000

Abstract

This paper investigates the political economy behind the three economic reforms in Indonesia, in 1983–91, 1994–97 and the reform under the IMF umbrella immediately after the 1997–98 economic crisis. The prevailing belief is that the Indonesian political economy scenario during those periods closely matched that of Weberian patrimonialism, in which the patron–client system was managed personally by Soeharto. Our findings indicate that, whereas economic reform was possible within the patron–client system in the initial stages of economic reform, this was not the case in later stages.

Notes

¹ Since civil society was still too weak during this period, the other stakeholders referred to here are business communities and, in general, government officers, party members and military people.

² The technocrats’ grip on these two agencies weakened when, in 1993, Soeharto appointed Mar'ie Muhammad (a career bureaucrat who is close to the patrimonialist group) and Ginandjar Kartasasmita (a patrimonialist) as the finance minister and as the chairperson of BAPPENAS, respectively.

³ Before 2000, the Indonesian government fiscal year was from April to March, hence, “in 1981/82” means from April 1981 until March 1982.

⁴ See Thorbecke (1992) or Woo et al. (1994) for the complete list of 1983–91 reforms. See also Heij (2001) for a detailed analysis of the income tax reform.

⁵ The ability to implement the 1983–91 reforms successfully distinguished Indonesia from other petroleum economies, such as Nigeria, which were not able to cope with the price falls during the 1980s.

⁶ Divestment in this case is a process in which foreign investors sell their ownership share to their domestic counterpart. The rule was supposedly to boost domestic ownership. At that time, the general rule of divestment was that within 20 years the total foreign ownership in a capital should be lower than 49%, except for export-oriented investments in export processing zones and Batam. It turned out that this policy discouraged foreign investors from entering the country.

⁷ See Woo et al. (1994) for the complete list of the 1994–97 reforms.

⁸ Unlike the previous investment boom in 1988–92, where textiles, garments and footwear made up the bulk of total investment, the second investment boom was more diversified, ranging from electronic components, automotive parts and chemicals, to food and beverages; also, most of the projects were destined to serve the Indonesian domestic market.

⁹ An overvalued rupiah and high domestic interest rates made borrowing abroad cheaper.

¹⁰ For the complete list of the IMF reforms, see Soesastro & Basri (1998), McLeod (1999) and Hill (1999).

¹¹ In early 1998 in the face of the continuously declining value of the rupiah, Soeharto considered applying the currency board system.

Additional information

Notes on contributors

Budy P. Resosudarmo

The first author would like to thank Hal Hill, Chris Manning and Ross McLeod of the Indonesia Project at the Australian National University for their support. Both authors also want to thank the two anonymous referees for their valuable comments and suggestions. However, any mistakes in this paper are the authors’ responsibility.

Ari Kuncoro

Ari Kuncoro, Department of Economics, University of Indonesia, Indonesia